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Planning Personal Finance - Assignment Example

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Planning Personal Finance

800 Cash outflow towards mortgage and insurance for the 2 additional months is (400+50) x 2 = ? 900 This offer is effectively lower than the base option by ? 100 For the offer of ? 265,500 with a moving date of 4 months, Cash inflow from higher offer is (265,500 – 263,200) = ? 2,300 Cash outflow towards mortgage and insurance for the 3 additional months is (400+50) x 3 = ? 1,350. This offer is higher than the base option by ? 950 Kyle and Helen should therefore accept the offer of ? 265,500 with a moving date of 4 months. 2. From the data presented in the case study, Kyle is not a stock market investor and holding the shares for sentimental reasons runs the risk of the value of those shares continuing to lose value. Kyle received the shares at no cost and any price that he gets is to be regarded as a profit. The recent fall in price of the stock is only a notional or paper loss. If Kyle can do an analysis of the distillery industry and the position of the local distillery company, he may be able to draw some conclusions on whether the dip in price is temporary or part of a long term trend. He can also get advice from a stock broker. His target should, however, be to sell the shares immediately or as soon as possible. Kyle may be liable to pay capital gains tax on the sale value if the price at which he sells is higher than the market price of the shares on the date he inherited them. If the total gain is less than ? 10,000, no tax is payable and of course, sale at a lower price also does not attract tax (HMRC, 2012). 3. Critical Illness Cover pays out a lump sum amount when a specified illness occurs, which for Kyle’s mother was a minor stroke. Once the claim amount is paid, the coverage ceases and she is not entitled to any other payments from the insurance company. A Permanent Health Insurance (PHI) policy would have paid her up to 65% of her pre-tax earnings until her normal date of retirement which is 65 years of age (Conner, 2013). When Kyle’s mother first considered insurance, the PHI policy would have been a better choice as it would have covered any medical condition that prevented her from working whereas the Critical Illness Policy would have covered only a specified list of ailments. Since a medical condition that prevents work could occur at any age, the PHI policy would have paid her money each year until her scheduled retirement age (Bevis, 2009). For Kyle’s mother, the question now is whether the ? 68,000 lump sum she received from her Critical Illness policy at the age 59 is better than 65% of her earnings for 6 years that she would have received with the PHI policy. This question can be resolved by finding out the yearly payments a PHI policy would need to make for 6 years that would equal the present value of the lump sum she received. The interest rate is assumed as 5%. The calculation is made in the table below and shows that an annual payment of ? 13,397.19 for 6 years from the PHI policy would have the present value that equals the lump sum of ? 68,000. To get these annual payments, the mother’s annual salary when she had the stroke should have been ? 20,611.06. The yearly payments for 6 years that would equal the present value   of ? 68,000 at 5% is given by the Excel formula (tvmcalcs.com)       =pmt(rate, nper, pv)           (in ? )   where,               rate is the annual interest rate of 5%     0.05   nper is the number of periods which is 6 years   6   pv is the present value which is ? 68,000     68000   The yearly payments that would equal the present value is (13,397.19)   Since the PHI payment is a maximum of 65% of present salary,     the mother's annual salary should have been a minimum of (20,611.06) ...Show more

Summary

1. The base option for Kyle and Helen is the offer of £ 263,200 where the sale of their old house is simultaneous with the move to their new house. …
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